Representative Alexandria Ocasio-Cortez (D-NY, 14th District) has called for nation-wide rent control. AOC’s plan is to not allow rent increases larger than 3% per year. This is somewhat surprising, given that she majored in economics at prestigious Boston University. I – along with virtually every other economics professor in the country — am always at great pains to present in my introductory to micro-economics courses the familiar supply and demand diagram. It demonstrates that rents below equilibrium levels create shortages. I suppose she missed that lecture. If so, she really should have obtained the class notes from someone else, and/or perused her introductory textbook. Senator Bernie Sanders has, if anything, done her one
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Representative Alexandria Ocasio-Cortez (D-NY, 14th District) has called for nation-wide rent control. AOC’s plan is to not allow rent increases larger than 3% per year. This is somewhat surprising, given that she majored in economics at prestigious Boston University. I – along with virtually every other economics professor in the country — am always at great pains to present in my introductory to micro-economics courses the familiar supply and demand diagram. It demonstrates that rents below equilibrium levels create shortages. I suppose she missed that lecture. If so, she really should have obtained the class notes from someone else, and/or perused her introductory textbook.
Senator Bernie Sanders has, if anything, done her one better: he is calling for a national rent control policy. California Governor Gavin Newsom has signed into law a policy along similar lines: rent increases shall be limited to 5% annually, in addition to any inflationary increases; this is coupled with making it more difficult to evict tenants.
Present New York City policy is very much in keeping with Rep. Ocasio-Cortez’s plan. It has recently worsened its previous rather Draconian rent control legislation. The presumed aim is to help tenants. But, there is something in economics called “unintended consequences.” Translation: “the plans of mice and men often go astray.”
Suppose, instead of exacerbating its rent control regulations, that the city council of this great city had tried this sort of thing with a different consumer good. Suppose the Big Apple had passed a law placing a ceiling of $1 on a fast food meal.The obvious result would be that McDonalds, Burger King, Wendy’s and their ilk would pretty much vacate the entire city. Posit that the city council mandated that gas stations charge no more than $1 per gallon. A similar result would ensue. Denizens of the New York City would be greatly inconvenienced.
Mr. DeBlasio would never institute any such ridiculous initiative. He would be laughed out of office if he did. Why, then, does the mayor think he can get away with inculcating analogous rules for residential real estate? This is because while burger and gas emporiums can easily locate elsewhere, the same is not true for buildings. If the owners had their ‘druthers, and this were economically and legally possible, they would hoist their real estate holdings upon onto giant wheeled vehicles, and roll them out of the city as soon as possible. New York City would then have no more accommodation for tenants than it would have fast food outlets or gas stations, under our hypothetical contrary to fact scenarios.
Of course, landlords can do no such thing, much as they would like to; heck, they would give their eye teeth to be able to cock a snook at the politicians in this manner.
But this inability of landlords does not mean that rent controls have no adverse effects upon local residents. They can certainly build less new capacity than would otherwise be the case. They may be legally compelled to upkeep and maintain presently existing apartments, but they will do so only reluctantly. “The customer is always right” which prevails in most industries, and will continue to do so for commercial and industrial real estate, which lack such unwise price controls, but will not apply to residential units. They will fight like the dickens to convert their holdings to condominiums and cooperatives. They will have incentives to – how can I put this delicately – not to be too unhappy if their buildings accidentally catch fire. Do we really want to promote such incentives, whether or not they actually become implemented?
Vacancy rates will plummet even further, with these new dispensations. This will have negative repercussions on labor mobility, when occupants fear to give up their rent controlled units. There will be a tendency to convert apartments to stores, to industrial and commercial uses. New laws will have to be enacted to prevent this, and will not be totally successful. Landlord – tenant relations will plummet even further (not of course for non-controlled, non-residential units.) New York City already has special courts charged with solving these confrontations. This is something not at all needed in any other industry. These costs are substantial, and the money misallocated in this direction could have been far more wisely spent.
The economics profession is not unified on too many issues, but this one is an exception. Opposition to rent control stretches all the way from Milton Friedman and Friedrich Hayek on one stretch of the political spectrum, to several scholars on the very opposite side. For example, in the view of Nobel Prize winner in economics Gunner Myrdal, “Rent control has in certain western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” And according to Assar Lindbeck, a Swedish economist, “In many cases, rent control appears to be the most efficient technique presently known to destroy a city except for bombing.” Almost as a follow up, Vietnamese Foreign Minister Nguyen Co Thach averred: “The Americans couldn’t destroy Hanoi, but we have destroyed our city by the very low rents.”
It is urged in favor of this policy that tenants are poorer than property owners, and, often, are compelled to spend an inordinate percentage of their salaries on rent. But, with fewer buildings being constructed, and more of them falling into disarray due to reduced maintenance, upward pressure on rent levels, paradoxically, will tend to be the result. It is an economic truism that the less supply, other things equal, the higher the price. There are no exceptions for housing, or based on the fact that this expenditure plays a large role in the budgets of poor and middle class householders.
In any case, we do not single out textile manufacturers and insist they alone help clothe the impoverished, that only grocers and restaurants feed them, that automobile, air conditioner and television purveyors all on their own make these products available to those who cannot afford them. All of these income transfers come out of general funds. I do not at all favor any of these policies, but fair is fair. Why should housing be any different? Why should landlords, alone, have to bear the entire burden of housing the poor?
Not only should these latest violations of private property rights be rescinded, but the entire notion that rent control can alleviate housing shortages and high fees should be confined to the dust bin not only of history, but of economics too. From a legal point of view, this is a taking. Landlords should be compensated for this seizure of the (value of) their property.